Best Value Outlet recently announced that it intends to pay dividends of $.40, $.60, $.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. What is the current value of this stock if the applicable discount rate is 13.5 percent?
A)$6.44
B)$7.83
C)$8.17
D)$9.55
E)$13.10

Question

Quizplus · Accepted Answer

To find the current value of the stock, we need to calculate the present value of each dividend and the present value of the price of the stock at the end of year 4. Then, we add up all these present values to get the current value of the stock. Here are the calculations:

PV(dividend at year 1) = $.40/(1.135^1) = $.3526
PV(dividend at year 2) = $.60/(1.135^2) = $.4717
PV(dividend at year 3) = $.75/(1.135^3) = $.5553
PV(dividend at year 4) = $1.00/(1.135^4) = $.7262
PV(price of stock at end of year 4) = ($1.00*(1.035))/(0.135 - 0.035*(1.035)) = $10.1744

Current value of stock = PV(dividend at year 1) + PV(dividend at year 2) + PV(dividend at year 3) + PV(dividend at year 4) + PV(price of stock at end of year 4) = $.3526 + $.4717 + $.5553 + $.7262 + $10.1744 = $12.2802

Therefore, the best choice is C.

Best Value Outlet Recently Announced That It Intends to Pay